Washington recently changed its assumptions for paying for public-employee pensions, a move that means higher costs in 2013 for workers, the state and local governments.
In a little-noticed vote last month, the state’s Pension Funding Council unanimously agreed to lower its assumption of future earnings on pension investments to 7.9 percent, down from 8 percent, in 2013-15.
That was the first step toward meeting state actuary Matt Smith’s recommendation of a 7.5 percent rate to guide earnings over the next 50 years. Smith has suggested a stair-step approach lowering the rate 0.1 percentage point in each of the next five budget cycles.
“It’s still our intent to move down all the way to 7.5 percent” by 2021-23, Republican state Rep. Gary Alexander of Thurston County said last week. He also said the move is putting the state pension system, which is fully funded in all but two plans, “on a more realistic footing.”
Alexander is the top Republican on state budget issues in the House and serves on the Pension Funding Council, which includes legislators and the state budget director.
House Ways and Means Committee chairman Ross Hunter, D-Medina, said the council decision was “another step to make sure our assumptions keep up with a changing economy … so we act deliberately and not precipitously.’’
He added that Washington has “one of the top five” pension systems for adequacy of funding in the United States.
The earnings expectation is important because more than half of every pension dollar paid out comes from earnings, according to the State Investment Board. The SIB invests more than $60 billion of public-sector pension trust funds and has earned more than 8 percent, on average, over the past two decades, despite two recessions.
The pension council also voted to change its assumptions on future employee pay raises (smaller), the size of the work force (smaller), inflation (lower) and other factors.
Following Smith’s advice to phase in the assumed earnings to 7.5 percent over five two-year budget cycles would cost the state just $38.5 million in the 2013-15 budget cycle, with local governments paying an additional $32 million and employees $4.3 million.
But the decision to phase in the reduced earnings has a more gradual effect on budget writers than would have occurred by making an immediate reduction in assumed earnings to 7.5 percent in 2013-15.
The more drastic approach would have required the state to increase its contributions to employee pensions by $368 million in 2013-15.
Brad Shannon: 360-753-1688
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